Chapter 7: Completing the

Accounting Cycle for a

Service Provider
ACCOUNTING CYCLE
1. Gather data based on various documents or business papers.
2. Analyze and record the documents in a book called the journal.
3. Classify and post from the journal to another book called the ledger.
1. Classify and post from the journal to another book called the ledger.

4. Extract the balances of the accounts in the general ledger and prepare a trial balance.
ACCOUNTING CYCLE
5. Gathering and journalizing the adjustments.
6. Posting the adjusting entries.
7. Preparing the adjusted trial balance
TIME PERIOD ASSUMPTION

 Calendar Accounting Period

 Fiscal Accounting Period
TIMING ISSUES
Example:
1. One year insurance paid in advance on March 1, 2018, should be
expensed only for 10 months in 2018 (March to December) and for 2
months in 2019 (January and February)
2. A consultancy job for 3 months which started Dec 1, 2018 was billed only
in Feb 2019 for P30,000 after the job was finished.
ACCRUAL PRINCIPLE
 recording of assets, liabilities, revenues or expenses at the time the
transaction took place regardless of when cash is paid or collected.
 Example :
 Ifyou buy an equipment today to be paid after 3 months, the equipment
should be recorded today even if it still unpaid.
 ADJUSTING ENTRIES
 Journal entries needed to update accounts and ensure accuracy of information
presented in the FS.
 Examples:
1. Supplies purchased and recorded as asset must be expensed for the used up portion.
2. Unpaid utility bills from Meralco and PLDT must be expensed as incurred.
3. Cash received in advance from customers recorded as liability must be recorded as
income the moment service has been rendered.
4. Tangible assets used in the operation but which will become obsolete or worn out
must be depreciated.
ACCRUED INCOME & ACCRUED EXPENSE

HEALTHWAY CLINIC:
ACCRUED INCOME & ACCRUED EXPENSE

MADRIGAL REALTY:
ACCRUED INCOME & ACCRUED EXPENSE

HEALTHWAY CLINIC:
ACCRUED INCOME & ACCRUED EXPENSE

RP FINANCE:
ACCRUED INCOME & ACCRUED EXPENSE
 PREPAID EXPENSE
 Opposite of accrued expense
 Represents an advance payment for an expense to be used up.
TWO METHODS USED IN RECORDING ADVANCE PAYMENT OF EXPENSES:
1. Asset Method
2. Expense Method
ADJUSTING ENTRY:
UNEARNED INCOME
 Advance collection from the clients or customers

TWO METHODS USED IN RECORDING ADVANCE COLLECTIONS:

1. Liability Method
2. Income Method
ADJUSTING ENTRY:
BAD DEBTS
 Losses from uncollectible accounts

TWO METHODS USED IN RECOGNIZING BAD DEBTS:

1. Direct write off method
2. Allowance method
DIRECT WRITE OFF METHOD
 Recognizes bad debts expense only when it is certain that the company will not
be able to collect the account anymore.
DIRECT WRITE OFF METHOD
DIRECT WRITE OFF METHOD
ALLOWANCE METHOD
• This method follows the matching principle which recognizes bad debts or
doubtful accounts at the time service is rendered.
ALLOWANCE METHOD
ALLOWANCE METHOD
ALLOWANCE METHOD
ALLOWANCE METHOD
 DEPRECIATION
 The recognition of part of the asset as an expense because of its decreasing utility
value.
DEPRECIATION
DEPRECIATION
DEPRECIATION
WORKSHEET
 A columnar paper where the first 2 columns are provided for the trial balance.
 The next 2 columns are for the adjustments and from which adjusted balances are
determined.
 From the adjusted balances, the income statement and the balance sheet are prepared.
WORKSHEET
Computation:

1. 10% x P49,000= P4,900

AJE:

DAE 4,900
ADAE 4,900
 Computation:

2. P15,000 * 4/6 = P10,000

AJE:

Insurance Expense 10,000

Prepaid Insurance 10,000
 Computation:

3. P600-200 = P400

AJE:

Supplies Expense 400

Prepaid Supplies 400
Computation:

4. (P30,000 * 12%)* 45/360 = P450

AJE:

Interest Receivable 450

Interest Income 450
Computation:

5. P150,000 – P50,000
-------------------------- = P10,000 per year
10

P10,000 * 9/12 = P7,500

AJE:

Depreciation Expense 7,500

Accumulated Depreciation 7,500
Computation:

6. P25,000 – P2,500
-------------------------- = P2,250 per year
10

AJE:

Depreciation Expense 2,250

Accumulated Depreciation 2,250
Computation:

7.( P50,000 * 18% ) * 30/360 = P750

AJE:

Interest Expense 750

Interest Payable 750
Computation:

8. P50,000 * 3% = P1,500

AJE:

Taxes & Licenses Fee 1,500

Taxes Payable 1,500